The most powerful ways to secure your retirement

This is a post from staff writer Robert Brokamp of The Motley Fool. Robert is a Certified Financial Planner and the adviser for The Motley Fool’s Rule Your Retirement service.

Whether you can retire, and whether your money will last after you retire, starts with a very simple maxim: spend less than you have. However, once you start actually crunching some numbers, you find that the equation of retirement is actually quite complicated, with many variables that have different consequences. And that’s a good thing, because it gives you options — different levers you can pull to shore up your retirement security.

What are those levers, and which will have the biggest impact on your retirement? As with many things regarding financial planning, the answers depend partially on your unique circumstances. However, in this article we’ll discuss the factors common to most retiree-wannabes, and quantify their results for two hypothetical workers – one 35-year-old and one 50-year-old — using the “Am I saving enough? What can I change?” calculator found on Fool.com. That calculator produces results in terms of the number of months your retirement will be fully funded. As the tool estimates the impact each variable has on our test subjects, we will report the results in terms of additional years of a fully funded retirement, just so you don’t have to divide the results by 12 in your head (not that we don’t trust your math skills — we just think it makes more sense to think in terms of years).

And now, let’s lay out the starting point for each of our guinea pigs, whom we’ll call Fergie and Madonna.

Name

Fergie

Madonna

Current Age

35

50

Income

50,000

75,000

Age at retirement

65

65

Monthly retirement income

$4,167

$4,688

Current value of 401(k)

$50,000

$250,000

Annual savings

$5,000

$7,500

Years retirement is funded

11.4

16.9

Age at which savings is depleted

76.4

81.9

As we go through this exercise, don’t focus too much on their particular numbers or how much those profiles are similar to yours. What we’re investigating is how many years of fully funded retirement are added due to various changes. The magnitude of those effects will be similar regardless of where Fergie, Madonna, or you are starting.

Let’s start with the no-brainer: Saving more will boost your retirement security. The younger you are, the bigger the impact. Remember that your savings rate is the combination of your contributions to your investment accounts as well as an employer match, if you get one. So someone who saves 10 percent but also receives a match of 50 cents on the dollar up to a saving rate of 6 percent is actually saving a total of 13 percent.

Strategy 2: Retire laterYears added to Fergie’s retirement: 2.8 at age 67, 10.0 at age 70
Years added to Madonna’s retirement: 5.0 at age 67, 8.1 at age 70

Retiring later can be very powerful, for three reasons: additional years of saving, additional years for portfolio to grow, and higher Social Security benefits. Also, while not captured in our analysis, another factor in your retirement security is how long your retirement will last, which is determined by when you’ll retire and when you’ll expire. You can control only one (assuming we don’t want to get macabre here), and the later you retire, the shorter your retirement will be. The benefits of retiring later also apply — though not as large — to working part-time in the first few years of retirement. All that said, a strategy of working a few years later is contingent upon being physically able to keep punching the clock.

Strategy 3: Require less retirement income
Years added to Fergie’s retirement: 10.3
Years added to Madonna’s retirement: 6.9

Our original scenario assumed that Madonna could live on 75 percent of her preretirement income, and Fergie would require 100 percent (since she’s not reached the ideally higher income she’ll have right before retirement). If we lower those percentages to 65 percent and 75 percent, respectively, then their retirements look much better. Some retirees can make it on $35,000 to $45,000 a year, especially if the mortgage has been paid off. But that income may not be enough to provide the retirement you aspire to. Also, there’s a big wild card when it comes to income needs, and that’s health care. The costs are rising, and they’re being covered less and less by Uncle Sam and former employers. Projected income needs should build in the possibility of unexpected increases in expenses.

Strategy 4: Get a lump sum due to downsizing, inheritance or other sourceYears added to Fergie’s retirement: 1.8
Years added to Madonna’s retirement: 3.2

This is tricky to quantify since the benefit depends on the size of the lump sum and when it’s invested. For our calculations, we assumed each Fergie and Madonna received a $50,000 windfall at age 50. The most likely source of such a chunk of change would be downsizing, which might be a good strategy for those who bought a big house many years ago in order to raise kids who have since left the nest. As for inheritances, they are big question marks since you don’t know what someone else’s estate will be worth or how much of it you’ll inherit. But those who are confident they’ll get something from someone might include a conservative estimate in their calculations.

Many other important factors

While those four are significant variables in your retirement equation that you might be able to control, several other factors will play a part. Here are just a few:

Investment returns: We assumed a 6 percent annual return for our calculations. Whether that turns out too pessimistic (as we hope) or optimistic, time will tell. But had Fergie and Madonna earned 8 percent a year, their retirements would essentially be fully funded. While that sounds oh-so-promising, don’t bet on getting bailed out by markets.

When to take Social Security, and what the program will look like: The decision about when to begin receiving benefits is not simple, especially if you’re married. Choosing the right strategy for your situation can provide higher benefits for the rest of your life. Of course, given the financial challenges facing the program and the country as a whole, it makes sense for younger workers to assume they’ll get three-quarters or less of what they’re currently projected to receive.

Income growth: Our analysis assumed that Fergie’s and Madonna’s income would grow at the rate of inflation, yet for most professionals, income actually grows faster. If our hypothetical workers were real go-getters and earned raises that exceeded inflation by two percentage points, that would fund another one to three years of retirement, due to bigger contributions to investment accounts and higher Social Security benefits.

Calculate, monitor, repeat

As you can see, your retirement has a lot of moving parts — some you can control, many you cannot. The good news is that a few tweaks here and there can have a large collective impact – and the sooner you begin tweaking, the better. No financial tool can predict the future, but some number-crunching can determine if you’re headed in the right direction, and the potential consequences of changing one or a few variables. Once you’ve done the analysis and taken action, monitor regularly — at least once a year. The road to retirement will take many twists and turns, but keeping your hand on the steering wheel and checking the map every once in a while will increase the chances that you’ll get there safe and sound.

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Instead of just settling for a traditional retirement plan, I’m building up a portfolio of businesses and investments that will provide me with income for retirement. Once the income from my investments is greater than my living expenses, I’ll be able to retire. The problem with just saving a lump some of money, which is what most seem to be trying to do, is that it is impossible to know if that money will last long enough. I’ve read reports saying that most people who were lucky enough to accumulate enough funds will still outlive the money they have saved up through out their life.

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@pfinMario

Yup. Perhaps the best thing that can be said is that if you don’t look at your options now, the decision will likely be made for you, as it’s being made for so many who are of retirement age.

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Carlos

Great info!

Sometimes when we think about retirement, we tend to think of just saving more. Nice to know there are a lot of levers we can pull. Thanks!

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hope

Great points made here. One that really hit home for me is the inheritance factor. My partner and I are in our late 50’s and are doing ok on our retirement planning. We will be ok with the plans we have made. My partner’s mother is 91 and her will clearly states that he will get quite a lot of money when she passes on and my parents have also said that they will leave me a smaller amount too. If this happens it will be great of course, but we are not counting on this whatsoever as we have heard horror stories of late in life issues that change everything. We decided not to count on it and plan only on our income. On the other hand, it is something in the back of our minds when we plan for our future. Way in the back. We don’t know quite what to do with it as it is not a sure thing. We really wrestle with this in our planning. Anyway, I love the article.

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Tracy (the other one)

There’s a possibility that I will receive some money from one parent also. However, I do not plan to receive it because the money will go first to the care of my dad and his spouse (and she comes from stock that lives to near 100). Their entire estate (which I think is worth a couple million now) could be burned up by long term care costs. I know my father will fight to his last breath to avoid a nursing home, and long-term live-in care is expensive. There are currently 5 heirs, also.

On the other hand, my dad and his wife are very frugal, so except for medical costs, this estate is likely to grow slowly for the next 15 years or so. So who knows?

I plan for us to live without any additional ‘bonus’ money in retirement, but getting an inheritance would be a great seed fund to set up an endowment or grant or substantial gift to charity after we’re gone. Or to help us with our own long-term care needs.

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BillGuard Blog

One part of this post that stuck with me: the many reasons why retiring later will boost your retirement income. I have long known (from reading financial blogs) that retiring later boosts your Social Security payout. But no one talks about the elephant in the room: that you will, frankly, need your retirement income to last for a smaller number of years, because passing away is the ultimate end of retirement. I appreciate that this post had the courage to make that point.

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Peach

The post had great info, I just look back at all the financial challenges throughout my life and I wonder if any preparation will matter as long as it’s so hard to even make a living, get health insurance to cover medical/dental expenses, pay for those uncovered expenses, pay for home repairs, etc. I’m watching my family and friends have to use money they’ve worked so hard to save, and it saddens me. The saving grace is that this info will be helpful to my adult kids. They’ve made some good decisions, but there’s always room for more. Forwarding this post to them!

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rosarugosa

Great article – nice and straightforward treatment of a complex topic.

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Wally

Great post. The option of working part-time in the first few years of retirement should not be discounted. It provides some extra income to reduce the reliance on your retirement savings. Plus it allows you to remain in the workforce, keeping the brain active and maintaining the social interaction. That itself can be so important, particularly for men who I find tend to have most of their social networks attached to their workplace.

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Darnell Jackson

How will savings help you if inflation is higher than any rate you can get from a savings account or CD.

Inflation has to be higher than 4%.

Where can you “save” money at that rate safely?

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Eric

Saving more in a 401k or IRA? I don’t think Robert is talking about putting retirement money in a saving account or CD. Instead of putting 15% in a mixture of stocks and bonds, put 20% in a mix of stocks and bonds and you will have more money for retirement.

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Nick @ ayoungpro.com

Very interesting!It looks like retiring less income at retirement is the way to go. Time to get that debt paid off and work on passive income!

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bethh

I find these calculators frustrating – how on earth do I know how much income I’ll need in 25 years, never mind 45? So I make wild stabs and the calculators *think* I’ll be okay (I’ve been saving at least 15% for much of the last 15 years, and still have 20+ years til retirement) but it’s hard to know if my inputs are any good.

I realize this is because it’s nigh impossible to actually calculate this stuff so far in advance, I don’t really blame the calculators, but it still makes it hard for me to have any confidence in the output.

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EMH

I have a hard time guessing what I need as well. What I have been doing is using my current monthly budget as my benchmark. I don’t have any debt besides my mortgage and even though that will be paid off by time I retire, I figure health care and inflation may equal my mortgage payments. It is by no means perfect but it gives me some sort of idea.

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Tracy (the other one)

That’s essentially what I do. We don’t have kids and our combined mortgage payments on two houses are less than 600/month. We live in a state with no income tax. Our expenses, apart from supporting a parent in a second home, are very low now. I can’t reasonably expect them to get much lower than this; in all likelihood, they will be at least 25% higher.

I also think that even for people whose current lives are expensive (high mortgage payments/kids in college/careers that require power lunches and drycleaning and daycare/etc.), it’s still worth assuming you’ll need 100% of your current income at the minimum in retirement. After all, medical bills are sure to be higher, and you’ll have all that free time. I tend to DO stuff when I have free time, and some of that costs money that a busy work schedule currently keeps me from spending.

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edward

Which state has no income tax??

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Tracy (the other one)

Edward…sorry I didn’t check this thread. We’re in Texas, but I think a few other states also have no income tax.

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Kurt @ Money Counselor

Very handy, thanks. Be interesting to see the effect of paying off high-interest debt, like credit card debt.

I was thinking that too! If we want to look at how certain changes can boost our retirement plan, the flip side is we have to look at the pitfalls that can damage our retirement security.

It’s fine to say “I’ll work until I’m 70” when you’re in your 30s or 40s — but I’d wager most people won’t know if they’re willing and able to work that long until they get closer to that age. Some of my parents’ friends were forced into retirement due to health issues or a job loss before they reached age 65. When we retire isn’t always within our control.

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Tracy (the other one)

I meant, we will not only be comfortable in retirement, but we will have wiggle room. Good times.

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Tracy (the other one)

This website has now eaten my original comment and two attempts to fix it.

To sum up: better calculator than every other one I’ve tried. Detailed inputs and, even better, income projections past the date of retirement, which allow you to see various income streams.

I tend to be very conservative on inputs (low rate of return, lowish projection for pension/social security, higher than might be required monthly expenses, etc.) We can’t, of course, plan for the biggest disruptions (massive medical bills, long term unemployment) but barring those things, the calculator was very reassuring. We seem to be on well on track for 30 years of post-retirement financial security, should we need it.

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Courtney

Absolutely one of the best articles I’ve ever read on GRS. And I didn’t even need cat pictures to get through it!

I’m going to run some of these calculators for myself; I’m at the “Rihanna” stage of life, so I want to seize the opportunity to optimize savings while it really counts.

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monsterzero

It took me a moment to realize that “downsizing” meant “moving to a smaller place”, and not “getting laid off”.

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My Financial Independence Journey

I ran some numbers on saving for retirement. What I found was that savings rate beat out rate of return by a long shot.

To make a long story short, save 20% of your income and you’ll be able to retire in 30 years assuming the low end of market returns. Pre-tax is better than post tax. And that’s without social security or pensions – both of which I consider to be gravy.

I consider strategy 2 only an option for certain people – those who love their jobs, or those without physically demanding jobs.

And strategy 3 is too sketchy. Maybe you’ll need less income in retirement, but maybe not. I prefer to assume that my expenses stay constant.

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Lucas

Saving more now means you need less in retirement. That is the single best strategy hands down, but it is the one people are most resistant too???? doesn’t make any sence. It is the one you have the most control over, and it is the least risky.

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Jane Savers @ The Money Puzzle

I wish Madonna would have retired 5 or 10 years ago.

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Tony@WeOnlyDoThisOnce

Thanks for this wonderful post. It is so important for me to consistently read about this stuff and do check-ups. Not quite sure where I fit…more like Fergie right now :).

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William Cowie

Good explanation. It makes a big difference in saving whether your financial future is a priority (I mean real priority) or if it’s just “one more thing on the list of things to consider.”

My wife and I went from the latter to the former too late in life, but when we did, man, what a difference that made.

When it comes to our retirement, it seems we are our own worst enemies…

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William Cowie

Good explanation. It makes a big difference in saving whether your financial future is a priority (I mean real priority) or if it’s just “one more thing on the list of things to consider.”

My wife and I went from the latter to the former too late in life, but when we did, man, what a difference that made.

It seems when it comes to our retirement, it seems we are our own worst enemies…

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Phoebe

I used the calculator (thanks for recommending – I love stuff like this) and we currently are set for about 20 years. Not nearly enough yet since we’re only 28, but not a bad start!!

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Mrs PoP @ Planting Our Pennies

I agree – that’s a pretty heavy duty calculator. And it looks like it’s coming up with similar results to the spreadsheet that I built recently – so that’s good news!

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Rohit

It is all about tweaking the equation of savings and spending. if yo can save more while you are working and need to spend less in retirement. You can drastically reduce the time it takes for you to retire.

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Jon @ MoneySmartGuides

Great post explaining the different factors that go into saving for retirement and how they effect your goals. My Dad ended up working a few extra years part time so that he could put off taking Social Security until he was older, in turn increasing his monthly payout.

It’s really eye-opening to see how much of a difference saving a little more has on the scenario’s as well. It goes to show that if you start young saving as much as you can, you have many more options of retiring early/on your terms than you otherwise would.

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